Boxer Retail Limited's (JSE:BOX) price-to-earnings (or "P/E") ratio of 21x might make it look like a strong sell right now compared to the market in South Africa, where around half of the companies have P/E ratios below 8x and even P/E's below 6x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Boxer Retail could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Boxer Retail
What Are Growth Metrics Telling Us About The High P/E?
Boxer Retail's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 42%. The last three years don't look nice either as the company has shrunk EPS by 88% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to slump, contracting by 0.9% per annum during the coming three years according to the seven analysts following the company. With the market predicted to deliver 18% growth per annum, that's a disappointing outcome.
In light of this, it's alarming that Boxer Retail's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.
What We Can Learn From Boxer Retail's P/E?
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our examination of Boxer Retail's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Boxer Retail with six simple checks on some of these key factors.
If you're unsure about the strength of Boxer Retail's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.